Xylem Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Team had strong Q1, exceeding expectations with revenue growth across segments, 20 basis points EBITDA margin expansion, and double-digit EPS growth. Book to bill remained above 1.
• Leaning into high-impact culture, simplifying processes/systems, and reorienting structure for improved customer focus. Reaffirmed full-year 2025 guidance based on current tariff levels.
• Achieved cost synergies faster than planned in Evoqua integration, with strong momentum on revenue synergies. Active M&A pipeline, including acquisition of Baycom (a leading technology company in zero liquid discharge).
• Exceeded 2025 sustainability goals, with annual sustainability report out April 30, and raised 2030 sustainability goals.

Segment Performance

• Measurement and Control Solutions (MCS): Total backlog at $1.8 billion, orders down 8% (driven by tough comps in smart metering, partially offset by analytics growth), revenue up 6% vs prior year (driven by energy growth, offset by water delivery calibration), EBITDA margin 21% (down 170 basis points y/y due to energy-water mix challenges).
• Water Infrastructure: Orders up 1%, revenue up 5%, EBITDA margin up 290 basis points (driven by productivity and price offsetting inflation and mix).
• Applied Water: Orders up 3% (fifth straight quarter growth), revenue up 1% (driven by building solutions, offset by 80/20 walkaway impacts), segment EBITDA margin up 300 basis points y/y.
• Water Solutions and Services: Orders down 5% (lapping tough comp), revenue up 1% (strength in services offset by weather impacts in SE US), segment EBITDA margin down 60 basis points y/y (driven by mix and lower volume).

Guidance

• Full year reported revenue expected $8.7 billion to $8.8 billion (up from prior $8.6 billion to $8.7 billion), organic revenue growth 3% to 4% (unchanged), EBITDA margin 21.3% to 21.8% (70-120 basis points expansion), EPS $4.50 to $4.70.
• Q2 revenue growth 1% to 2% reported, 2% to 3% organic; EBITDA margin ~21% to 21.5% (flat to up 50 basis points); EPS $1.12 to $1.16.
• MCS EBITDA margin expected to be low in Q2, then improve sequentially and expand in the second half.

Risks

• Tariff uncertainties, including potential changes in tariff rates and their impact on demand.
• Inflation, currency fluctuations, and interest rate changes that could affect business performance.

Question and Answer

• Q: Did customers preposition inventory ahead of tariffs?

A: No significant pull-ins seen; only small impact in Applied Water commercial business.

• Q: How is Xylem managing pricing related to tariffs?

A: Mix of surcharges and price increases, active and nimble in adjusting to evolving tariff situations.

• Q: Details on M&A and capital deployment?

A: Active M&A pipeline focused on core capabilities, including acquisitions, with plans for dividends and share buybacks.

• Q: Is the Water Solutions and Services segment lumpy?

A: Yes, it's the lumpiest segment, but fundamentals strong with backlog up 6% to 7% year over year.

• Q: How does tariff impact Xylem's competitive position?

A: Diversified portfolio helps maintain a strong competitive position despite tariff challenges.

• Q: What's the impact of organizational realignment?

A: Teams are more focused, decisions are quicker, with 16 division GMs having end-to-end P&L accountability for improved customer focus.

• Q: Outlook for MCS margin?

A: MCS EBITDA margin expected to be low in Q2, then improve sequentially and expand in the second half.

• Q: Impact of 80/20 on orders?

A: Built into guidance with a ~1% headwind, no material change with tariffs as incremental pricing provides tailwind if no major demand pullback.

• Q: Trends in April orders?

A: Tracking to forecasting, no major pullbacks yet, with some project delays on industrial treatment side within normal hedging scope.

• Q: Sequential margin dynamics in MCS?

A: Q2 expected to be low, then sequential improvement starting in Q3 and continuing into Q4.

• Q: Book to bill outlook for second half?

A: Normal order pattern expected as projects rephase, leading to above-one book to bill in the second half.